Category Archives: Business Litigation

Failure to Use Basic Security Protections when Transferring Electronic Files Results in Waiver of Privilege

The Attorney/Client Privilege and Work Product Protection for a video file transferred via Box.com was lost when a client failed to use basic security precautions.  A February 2017 ruling by a Western District of Virginia magistrate judge in Harleysville Insurance Company v. Holding Funeral Home, Inc. (Case No. 1:15-cv-00057) should reinforce a requirement that lawyers use basic security protections (at a minimum) for all potentially privileged or protected communications.

  1. All Too Common Facts

There are no winners in this case. Both sides of the Harleysville Insurance matter were scolded by the magistrate judge.  In this case, an insurance investigator transferred a video file to its company’s counsel using Box.com, a popular file transfer and sharing service. To notify counsel of the transfer, the investigator sent an email that included the hyperlink to the video file.  Months later, the transmission email was produced in discovery.  Defendants’ counsel spotted and then tested the hyperlink, and immediately found the video file.

It appears from the recitation of the facts that the investigator knew how to use the basic transfer capabilities of Box.com but was never trained or instructed to use even the basic security tools. For example, Box.com allows for the creation of secure folders and the controlled access to any folder.

To make matters worse, the video file resided on the Box.com site accessible by the hyperlink for at least six months.

  1. Attorney/Client Privilege and Work Product Protection Waiver

After the access to the Box.com site and the video file were exposed, Harleysville argued that the defense counsel’s access to the file was an improper, unauthorized access to privileged information, and this should require the disqualification of defense counsel. The argument in response was that Harleysville had waived any claim of privilege or confidentiality by placing the information on Box.com without using any of the available security tools.

Attorney/Client Privilege.  The court analyzed the Attorney/Client Privilege waiver separately from the Work Product Protection issue.  Its first finding was that Harleysville waived any claim of Attorney/Client Privilege with regard to the information posted on Box.com.  The court concluded that “the information uploaded to this site was available for viewing by anyone, anywhere who was connected to the Internet and happened upon the site by use of the hyperlink or otherwise.”  The decision continues, “In essence, Harleysville has conceded that its actions were the cyber world equivalent of leaving its claim file on a bench in the public square and telling its counsel where they could find it.”

Attorney/Client Privilege issues in the case were governed by state law. Virginia law provides protection for privileged communications. See Walton v. Mid-Atlantic Spine Specialists, 694 S.E.2d 545. 549 (Va. 2010).  But this privilege is an exception to the general duty to disclose and should be strictly construed.   Continuing, the proponent of the privilege has the burden to establish that the Attorney/Client Privilege applies and that the privilege has not been waived.

The Walton case adopts a multifactor analysis for determining whether the holder of a privilege took reasonable steps to prevent disclosure and also took reasonable steps to rectify the error. The first listed factor is “the reasonableness of precautions to prevent inadvertent disclosures.”  Harleysville’s failure to take any reasonable security precautions doomed its argument from the start.

Work Product Protection.  Work Product Protection in this matter was governed by federal law.  The Harleysville Court built its analysis on the Fourth Circuit’s recognition “that the inadvertent disclosure of attorney work product, even opinion work product, can result in a waiver of its protected status.”  This guidance is tempered by additional appellate authority that holds that a waiver should occur only when an attorney’s or client’s actions are “consistent with a conscious disregard of the advantage that is otherwise protected by the work product rule.”

FRE 502(b) would protect an “inadvertent” disclosure.  But the magistrate judge reasoned the disclosure here could not be inadvertent because the investigator clearly intended to transfer the video file to Box.com.  The Court also looked to Rule 502(b)(2), which provides that the disclosure is not a waiver if the holder of the protection “took reasonable to prevent disclosure.”  Again, Harleysville was in a bad place because it failed to take any steps.

The magistrate judge was obviously troubled not only by the transfer of the video file to Box.com without any security precautions, but also by the client leaving the unprotected file on the Internet site for at least six months.  The conclusion followed that this carelessness waived the Work Product Protection.

  1. Sanctions Imposed against Defense Counsel

In the introduction to this Blog post, we noted that both sides were scolded by the Court.  The investigator’s email that included the hyperlink also included a Confidentiality Notice.  This Notice coupled with the obvious significance of the video file was sufficient for the Court to conclude that the defense counsel should not have downloaded and studied the file. The Court wrote, “by using the hyperlink contained in the email also containing the Confidentiality Notice to access the Box Site, defense counsel should have realized that the Box Site might contain privileged or protected information.”

Harleysville argued that the appropriate sanction should be the disqualification of defense counsel. The magistrate judge agreed that there was an ethical stumble, but concluded that the disqualification was an unnecessarily severe sanction. She did, however, order that defense counsel should bear the parties’ costs in obtaining the Court’s ruling on the matter.

  1. Summary and Conclusions

The immediate instruction from the Harleysville magistrate judge’s ruling is that if a party chooses to use a new technology, it will be held responsible for ensuring that its employees and agents understand how the technology works, and, more importantly, whether the technology allows unwanted access by others to its confidential information.   The Box.com facts present a straightforward set of facts—the basic security features of Box.com would, if utilized, have blocked access to the video file.

The case sets the stage for a broader set of responsibilities associated with newer and more sophisticated security technologies.  For example, now that encryption technologies are readily available, should a disclosure that would have been blocked by the use of even simple encryption be deemed a waiver of privileges?   In Harleysville, the Box.com tools were present but not utilized.  In the encryption example, the tools can be acquired and then used, but as of today are probably not widely installed.  But this could change overnight when courts understand that Microsoft has added encryption options to Outlook.   The Harleysville reasoning likely will make it a requirement, not just a recommendation, that lawyers employ encryption for potentially privileged or protected communications.

H/T to Sharon Nelson and the VSB 2017 TechShow for flagging the significance of the Harleysville Ins. Co. v. Holding Funeral Home, Inc. ruling.

EDVA: Legal Malpractice Does Not Give Rise to Breach of Fiduciary Duty Claim

A claim of legal malpractice by client against a former attorney does not, at the same time, give rise to a breach of fiduciary claim under Virginia law, according to Judge Henry Hudson of the Eastern District of Virginia (Richmond Division).  Judge Hudson’s ruling is a development in the law of fiduciary duty, and it goes into territory that has not yet been covered by the Virginia Supreme Court.

In Kylin Network (Beijing) Movie & Culture Media Co. Ltd v. Fidlow, 3:16-cv-999-HEH, 2017 WL 889620 (E.D. Va. Mar. 6, 2017), the case began with a Chinese company that wanted to make a movie about the life of martial arts legend Bruce Lee.  The company hired the defendants (a Virginia attorney and his former law firm) to negotiate and obtain the movie rights with the supposed copyright owner.  According to the Complaint, after some negotiation, the attorney recommended that the plaintiff pay $1 million to the supposed seller of the rights.  After the payment was made, the plaintiff allegedly discovered the seller did not have good title to the movie rights.  The unhappy client then filed a three-count complaint in federal court against its former attorney for legal malpractice, breach of fiduciary duty, and fraud.

The defendants sought to dismiss all counts of the Complaint under Fed. R. Civ. P. 12(b)(6).  The defendants first argued that the legal malpractice claim failed due to the plaintiff’s contributory negligence.  While Judge Hudson recognized that contributory negligence could be a complete defense to legal malpractice, he ruled that the defense had to be resolved at trial by the fact-finder when “reasonable minds could disagree” on the disputed facts.  Thus, the judge denied the 12(b)(6) motion on this count.

The defendants, however, had better luck on the remaining two counts.  The plaintiffs’ breach of fiduciary duty claim, according to Judge Hudson, was based upon duties arising from the attorney-client relationship.  In turn, this relationship was based in contract, specifically the written engagement agreement between the law firm and the clients that gave rise to the legal malpractice claim.  Judge Hudson noted that the Virginia Supreme Court has not ruled on the issue, but based upon prior precedent, he held that the breach of fiduciary duty had to arise from a duty independent of the attorney-client contract.  According to Judge Hudson, “[i]n Virginia, because legal malpractice is a contract claim, an additional claim for breach of fiduciary duty must be based on something other than a violation of a duty arising under the attorney-client relationship.”

Judge Hudson then made short work of the remaining fraud count, dismissing it on similar grounds and holding that such a claim must arise from a source other than the contractual relationship between the parties.

The plaintiffs’ legal malpractice claim survived the 12(b)(6) stage, which appears to be the true core of the plaintiffs’ case.  But Judge Hudson’s opinion is notable as a development in the law of fiduciary duty in Virginia, a claim that seems to appear more frequently in business litigation in the Eastern District.

Suing a URL: A Roadmap to a Cybersquatting Action

As more economic activity occurs online, internet domain addresses are increasing in value, especially for small- and medium-sized businesses.  Businesses of all sizes need to pay attention to the security of their internet domain addresses, and a recent EDVA decision highlights the dangers of losing control of a business’s domain address.

In Jacobs Private Equity, LLC v. <JPE.com>, Case No. 1:16-cv-01331, 2017 WL 830397 (E.D. Va. Feb. 2, 2017), Magistrate Judge Ivan D. Davis faced a “cybersquatting” claim that is becoming more common.  Plaintiff Jacobs Private Equity, LLC, operated www.jpe.com as its website for over 12 years.  One day, however, its employees suddenly found that their login credentials to the website no longer worked.  According to the Complaint, an employee was the victim of an email “phishing” scheme where she was conned into divulging her login credentials.  The hackers then logged into the internet domain registry and changed the password to the business’s account.  As a result, the business lost control over its website and email addresses, and a new entity registered its purported ownership of the domain address.

Represented by Mark H. M. Sosnowsky of Drinker Biddle’s DC office, the business filed suit in the Eastern District of Virginia under the federal Anti-Cybersquatting Consumer Protection Act (the “ACPA”), 15 U.S.C. § 1125(d), et seq.  The Eastern District frequently sees these actions because many of the most popular internet domain registrars have offices in northern Virginia.  In this case, VeriSign, Inc., served as the registry, and it has an office in Reston, Virginia.

Suing an Internet Address

In a marriage of ancient legal principles and new information technology, a lawsuit under the ACPA is an in rem action against the internet domain address itself (and similar to an in rem action against a parcel of real estate or tangible personal property).  While the actual internet domain address is named as a defendant, the real defendant is, of course, the party who registered the address.

An ACPA action also involves elements of traditional trademark law.  In fact, the ACPA is part of Title 15 of the U.S. Code which focuses on federal law governing trademarks, also commonly referred to as the Lanham Act.  Under the ACPA, a court may order the forfeiture or cancellation of a domain name, or transfer of a domain address to the rightful owner of the mark. The ACPA applies, for the most part, to marks that are distinctive or famous.

A Common Problem

Fraudulent phishing schemes, such as the one that snared Jacobs Private Equity, are unfortunately increasingly common.  The usual pattern for this scheme is that bad actors outside of the United States will either take over the registration for a valuable website, or will watch for a non-renewal of registration for an active website.  The new party will swoop in, register the domain, and then offer to sell the domain back to the previous user for exorbitant amounts.  This frequently ensnares small businesses who fail to renew a website registration, such as by relying upon an expired credit card for an expected “auto-renewal” that never occurs.  The ACPA was enacted in 1999 in hopes of curbing such problems.

Elements of an ACPA Claim

Judge Davis’s opinion provides a useful roadmap for cybersquatting claims.  Treating an internet domain address as a trademark, a plaintiff must prove two elements to succeed on a cybersquatting claim:

  1. The domain name is identical or confusingly similar to the plaintiff’s mark.
  2. The registrant had bad-faith intent to profit from the domain name.

Traditional Trademark Law

The ACPA protects both registered trademarks and unregistered, common law marks.  While a common course of action for a business is to register its trademarks with the U.S. Patent & Trademark Office, a business may also acquire common law trademark rights by actual use of the mark in the market place.  For example, a small jewelry shop that has operated for 15 years as “Kitty’s Fine Jewelry” likely has a common law trademark rights in the name.  And if that small jewelry shop also operated a website (such as www.kittysfinejewelry.com), it will likely have a strong ACPA claim against a subsequent registration of the domain by a party acting in bad faith.  A business need not make a formal registration with the USPTO to have such protection.

Proving Bad Faith

Proving “bad faith intent” is often the challenge in these types of cases.  Because we cannot see into a person’s mind to determine intent, the ACPA sets forth nine “factors” that a court “may consider” in determining a person’s intent.  These factors operate as non-exclusive guides to the court (which is a concept similar to the common law “badges of fraud” used in traditional fraudulent conveyance law).  The nine factors under § 1125(d)(1)(B)(i) are as follows:

  1. Any preexisting trademark or other rights in the name used in the domain address.
  2. Whether the domain name contains the legal name of the person or a name that is commonly used to identify the person.
  3. Prior use of the domain name in connection with bona fide goods or services.
  4. Legitimate noncommercial or fair use of the mark in a site that uses the mark in the domain address.
  5. Intent to divert consumers from the mark owner’s online location to another site that could harm the goodwill represented by the mark.
  6. Whether the person offered to sell the domain name back to the mark owner for financial gain without having used the domain in any legitimate business activities. (This factor also includes whether the person has engaged in such activity in the past, indicating a pattern of such conduct.)
  7. Providing false or misleading contact information during the registration of the domain address.
  8. Acquiring multiple domain names which are identical or confusingly similar to multiple preexisting marks.
  9. Whether the mark is distinctive or famous at the time of registration of the domain name.

Of course, not all of these factors will apply in a given case, and there is no set standard for how many factors need to be present to establish bad faith.  Rather, a court has wide-latitude in these fact-intensive cases.

Service of Process Issues

In Jacobs Private Equity, the new registrant of the disputed internet domain address never responded to the complaint, so Judge Davis recommended that a default judgment be entered.  In Judge Davis’s Report and Recommendation (“R&R”), he first focused on the efforts that the plaintiff went to effect service of process.  The plaintiff tried the telephone number, mailing address, and email address listed by the new registrant, but all turned out to be bogus.  The plaintiff then sought court approval to publish notice of the lawsuit in The Washington Times.  Once this was accomplished, the court was satisfied that the default judgment could be granted.

The Plaintiff Prevails

Even though the defendant defaulted, Judge Davis still performed the ACPA statutory analysis in his R&R.  He determined that the plaintiff had a valid common law trademark rights in “JPE” and that the new registrant acted in bad faith by providing bogus contact information to VeriSign, among other factors.  No objections to Judge Davis’s R&R were ever filed, and on March 2nd, District Judge Liam O’Grady adopted the R&R in full, ordering the internet register to return the domain address to the plaintiff.

Alternatives to Litigation

 While the ACPA provides a legal remedy in federal court, aggrieved mark owners can also pursue an administrative challenge to bad-faith registration.  Known as a “Uniform Domain Name Dispute Resolution Policy” (“UDRP”) proceeding, the action is essentially a private arbitration filed with the internet registry overseeing the disputed domain.  While it can be faster and cheaper than litigation, the range of remedies allowed in such an arbitration are fewer than those available from a federal court.  And a successful arbitration can have little or no deterrence or precedential value against other cybersquatters targeting a specific website.

 Conclusion

The ACPA provides a legal remedy to businesses and individuals who have been victimized by the theft  or loss of control of their internet domains.  The statutory framework is straight-forward, but proving bad-faith intent can be challenging, especially when defendants evade service of process or mask their identities.  Yet, with the rise of online commerce (especially for small- and medium-sized businesses), we will likely see more incidents of stolen internet websites, and by virtue of the Eastern District’s geographic location, more cybersquatting claims brought in this court.

Filing Deadline Changes: The Disappearance and then the Return of the 3-Day Cushion

On December 1, 2016, amendments to Fed. R. Civ. P. Rule 6(d) went into effect.  At the same time, amendments to EDVa Local Civil Rule 7(F)(1) also went into effect.  For practical purposes, the F.R.C.P amendments make ECF service good for nearly all purposes and eliminate the added 3-day cushion that applied to most response and reply filings.  The EDVa Local Rule revision adds back the otherwise lost three days.  While the overall consequence may seem insignificant, you should be alert to at least one nuance from these changes.

To appreciate the changes, we summarize below the F.R.C.P. Rule 6(d) amendment and the changes to Local Civil Rule 7(f)(1).  Then we revisit the Sprint Option provision in the standard Rule 16(b) Scheduling Order used in the Alexandria Division.  See R. Larson, “The 1-Week EDVa Discovery Sprint from Filing to Ruling in 7½ Days.”  As explained below, the combined new F.R.C.P. and Local Rule amendments provide some added coverage for the beloved Sprint Option.

FRCP Rule 6(d) Amendments — Good-bye 3-Day Cushion

In April 2016, the U.S. Supreme Court approved the F.R.C.P. Rule 6(d) amendment that removes electronic service from the modes of service under Rule 5(b) that allows an extra three days for responses.   The Rule before amendment provided:

(d) Additional Time After Certain Kinds of Service. When a party may or must act within a specified time after service and service is made under Rule 5(b)(2)(C), (D), (E), or (F), 3 days are added after the period would otherwise expire under Rule 6(a).

The workings of this Rule for the most part simply extended the motion response and reply times by three days.  For example, a motion that provided 11 days for the response in fact provided 14 days because of the 3-day cushion that was automatically added.  Now, when the services is by ECF (which is covered as electronic service under Rule 5(b)(2)(E)), the 3-day cushion vanishes.

The amended version of the Rule looks almost exactly the same except a close look shows that subpart 5(b)(2)(E) has been erased.   This now-gone segment is where Rule 5(b) allows for electronic service, which we usually translate to mean ECF service.  A quick look at Rule 5(b)(2)(E) suggests that the electronic service provisions apply only if the receiving party “consented in writing” to electronic service.   You might conclude that the changes add to a big nothing because you perhaps could refuse to consent.  You may have forgotten, however, that when you registered for ECF filing (as all EDVa practitioners are required to do) you consented to electronic service.   The EDVA Complete E-Filing Policies and Procedures Manual provides in Chapter 4 that “[b]y participating in the electronic filing process, the parties consent to the electronic service of all documents and will make available electronic mail addresses for service.”

To this point in the analysis, the F.R.C.P. Rule 6(d) amendments effectively shorten the response and reply times for most motion pleadings.

Local Civil Rule 7(F)(1) Amendment — the 3 Lost Days Return

EDVa Local Civil Rule 7 covers local Motions practice.  Subpart (F)(1) provides for filing response and reply briefs, and until the new revisions took effect set the filing dates at 11 days and three days respectively.  But with the addition of the 3-day cushion, the effective response and reply dates have been 14 days and six days.  The Local Rule subpart read (until now):

(1)  All motions, unless otherwise directed by the Court and except as noted herein below in subsection 7(F)(2), shall be accompanied by a written brief setting forth a concise statement of the facts and supporting reasons, along with a citation of the authorities upon which the movant relies. Unless otherwise directed by the Court, the opposing party shall file a responsive brief and such supporting documents as are appropriate, within eleven (11) days after service and the moving party may file a rebuttal brief within three (3) days after the service of the opposing party’s reply brief. No further briefs or written communications may be filed without first obtaining leave of Court. [Emphasis added.]

Absent modification of this Local Rule, the amendments to F.R.C.P. Rule 6(d) would result in significantly shorter response and reply times.

The EDVa amendments to Local Civil Rule 7(F)(1) substitute 14 days and three days as the new response and reply dates.  This Local Rule change was issued on extreme short notice—on November 17, 2016, only two weeks ago.  So we are essentially back where we started.  The major difference is that we have eliminated a provision appropriate to the time when nearly all pleadings traveled by snail mail.

When practicing in other Districts, be sure to check the Local Rules to see whether the EDVa changes have been adopted in the other District.   Failure to check could potentially result in painful consequences.

The Sprint Option and the Alexandria Division’s Rule 16(b) Scheduling Order

The give/take changes described above are not entirely neutral.  One difference is that the combined new F.R.C.P. and Local Rule amendments provide added coverage for the Sprint Option.

What we refer to as the “Sprint Option” is a creature of the standard Alexandria Division Rule 16(b) Scheduling Order, and it is not a Local Rules provision.   The standard Scheduling Order issued by the Alexandria magistrate judges includes this language:

In order to provide for the prompt resolution of non-dispositive matters, a non-dispositive motion may be filed and served by no later than 5:00 p.m. on a Friday and noticed for a hearing at 10:00 a.m. on the following Friday. Under this expedited schedule, a response must be filed and served by no later than 5:00 p.m. the Wednesday before the hearing and any reply should be filed and served as early as possible on Thursday to give the Court time to review all pleadings before the hearing. At the moving party’s discretion, a non-dispositive motion may also be filed and noticed for a hearing in accordance with the briefing schedule provided in Local Civil 7(F)(1) discussed above in order to provide additional time for briefing and consideration by the Court. [emphasis added]

In short, file and serve by 5 PM on Friday, and you can be before the Court the next Friday morning.

This is a key provision that greatly disturbs lawyers from other districts, but also one that keep the Rocket Docket roaring forward.  The 3-day cushion, however, had the potential to disrupt this process.  To stay on the Sprint Option track, a party had to avoid the 3-day cushion in prior F.R.C.P. Rule 6(d).  This required service of the pleading by “handing it to the person” to be served, or by leaving the pleading at the person’s home or office.   For practice in the Alexandria Division, this was a major impediment if the opposing counsel (or local counsel) was anywhere outside of Alexandria.

The above-describe challenge goes away with the combined F.R.C.P. Rule 6(d) and EDVa Local Rule 7(F)(1) amendments.  ECF service by 5:00 PM on Friday (with the NEF returned—service time is when the NEF issues, and not when you hit the last ECF button) suffices, and the Sprint Option is now more widely available without concerns about the in person service and the 3-day cushion.  The same applies to the Sprint Option responses and replies—ECF filing is adequate service without adding the 3-day cushion.

Handling Overlapping and Duplicative Damages

In a recent case, Judge Liam O’Grady astutely handled in his Jury Instructions and a Special Verdict Form the prospect of a jury’s duplicative and overlapping damage determinations.  He then resolved the parties’ dispute on overlapping damages when he decided post-verdict remittitur motion.  This case provides a roadmap for practitioners on how to handle similar problems in future cases.

Multi-count Complaint and Overlapping Damages

The case of Hair Club for Men, LLC v. Ehson et al, Civil Action No. 1:16cv236–LO/JFA involved a two-year covenant not-to-compete.  Plaintiff (a former employer) sued to enforce the covenant against a departing employee and her new employer.  Plaintiff sought not only an injunction but also considerable damages.

The Complaint alleged the usual suite of claims found in covenant-not-to-compete cases. The leading claim was for Breach of Contract, followed by claims for Trade Secrets Misappropriation, Tortious Interference, Unjust Enrichment, and Breach of Fiduciary Duty.

The case narrowed at summary judgment when the Court held that the defendants were liable on certain counts.  Judge O’Grady ruled that the non-compete covenant was enforceable, and that, as a matter of law, the ex-employee breached her fiduciary duty.  But still the Trade Secrets and Tortious Interference claims had to be tried, and the measure of damages for all claims was left open for trial.  Perhaps surprisingly, the case did not settle after these rulings.

Seven months after filing of the Complaint, the case went to a jury trial for four days.  The jury’s Special Verdict Form awarded Breach of Contract damages of $156,096, and then awarded damages of $258,330 on each of the three remaining counts.  Additionally, the jury responded to the question of whether the damages awarded were duplicative by circling “Yes.”

Jury Instructions and Special Verdict Form

Judge O’Grady’s jury instructions navigated through the duplicative damages issue, and the Special Verdict Form focused the jury on the key question of duplication.  Jury Instruction No. 39 addressed the possibility of overlapping damage awards:

In this case, Hair Club seeks to recover the same type of damages for lost profits on its breach of contract, breach of fiduciary duty of loyalty, misappropriation of trade secrets and tortious interference with contract and business advantage claims. A party is not entitled to multiple recovery for its losses. However, if you find that Hair Club has proved every element of each of its damages, and is entitled to recover for its claimed losses, you will be asked whether the recovery is duplicative, so that Hair Club does not recover more than it is entitled.

On the Special Verdict Form, Question No. 7 asked “Are any of the answers to questions 1, 3, 5, or 6 duplicative?”, followed by a simple “Yes/No” option.  (The four identified questions corresponded to Plaintiff’s four separate remaining counts.)

Dealing with Duplicative Damages

Despite the simple “Yes/No” question, the jury’s verdict left uncertainty as to the overall damages.  If the Court simply added all of the multiple damage awards, then the result would be a judgment for $934,086.  Plaintiff agreed that the jury intended that the three awards of $258,330 were for the same conduct and damage.  But Plaintiff also argued that the Breach of Contract damages should be added to the common damages, for a total damage award of $414,426.  Judge O’Grady, however, concluded that the appropriate total damage award was $258,330.

Virginia law prohibits the award of duplicative damages “when the claims, duties, and injuries are the same.” Wilkins v. Peninsula Motorcars, Inc., 266 Va. 558, 587 S.E.2d 581 (2003).  Judge O’Grady added that the “two claims are not duplicative if the conduct underlying the claims is different.”  For this, he cited Advance Marine Enterprises, Inc. v. PRC Inc., 256 Va. 106, 501 S.E.2d 148 (1998), and his analysis tracks the Wilkins opinion.  The trial court must “evaluate whether multiple damage awards constitute impermissible double recovery” and that under Virginia law it is the responsibility of the trial court in reviewing a verdict to supervise “the damage awards to avoid double recovery.”

Plaintiff relied on Advanced Marine to argue that the damages were in part separate and therefore should be added to yield the aggregate damage award, but Judge O’Grady distinguished Advance Marine.   In that case, the plaintiff proved a common set of compensatory damages under separate claims for Trade Secrets Misappropriation and Business Conspiracy.  While the plaintiff was limited to only one set of compensatory damages, the plaintiff was allowed to recover both punitive damages under the Trade Secrets claim and to treble the compensatory damages under the Business Conspiracy claim.

Judge O’Grady summed his conclusion by stating that “compensatory damages for the same injury, based on the same evidence, should be awarded only once.  This was consistent with Advance Marine.  This rule holds even if the injury is articulated in multiple causes of action with separate burdens of proof.”  But equally important, the judge ruled that it was his responsibility to make the determination using the jury’s answers on the Special Verdict Form.

Summary

The dilemma of overlapping and repetitive damages arises frequently.  In the case before Judge O’Grady, the jury considered damages on four separate counts.  The trial evidence, however, addressed the damages as a single compensatory loss.  When the jury answered that the damages were duplicative, it was then the trial judge’s responsibility to resolve the parties’ disagreement on the extent of the duplication.

Too often, a jury’s verdict states only its liability findings and separate awards on multiple counts.  In this situation, a judge ventures into potentially dangerous territory if he or she imputes that the damages are duplicative.

A question for both trial lawyers and judges is how best to manage this issue to steer away from the quagmire.  Judge O’Grady’s jury instruction in Hair Club cleanly instructs on duplicative damages.  He coupled his Instructions with the simple Special Verdict Form question about duplication.  In Hair Club, this seems to have worked well, and perhaps is the model for multi-count cases where the claimed damages overlap.

New Trend in Attorney’s Fees Declarations?

As the judges of the Eastern District continue to differ regarding reasonable hourly rates for attorneys, practitioners need to be aware of a potential new trend regarding declarations supporting or opposing petitions for attorney’s fees.  Unfortunately, that new trend appears likely to make such petitions more detailed and time-consuming – and therefore, more expensive.

Traditionally, declarations supporting a petition for attorney’s fees in the Eastern District have followed a familiar pattern: An outside attorney reviews the hourly rates charged, the number of hours charged, the docket sheet, and selected motions/briefs.  The resulting opinions were usually based upon a “general” review of or familiarity with the litigation.  These reviews were not usually “deep dives” into the documents, pleadings, or billing records for a good, simple reason:  keeping costs down.

This custom may need to change, based upon the recent case of Salim v. Dahlberg, 1:15-cv-468 LMB / IDD, 2016 WL 2930943 (E.D. Va. May 18, 2016), which was covered by the EDVA Update here.  In that case, Judge Leonie M. Brinkema of the Alexandria Division was faced with a petition for attorney’s fees after the plaintiff prevailed on part of his civil rights claim.  The petition was supported by declarations from six leading attorneys, all whom have extensive experience in the Eastern District.  As Judge Brinkema said in her opinion, all six were “well-known to and well-respected by the Court,” and all “summarily conclude[d] that the hourly rates charged and hours worked were reasonable.”

In opposition, the defendant submitted one declaration by attorney Wayne G. Travell, a partner with Hirschler Fleischer’s Tysons office.  Despite the lop-sided number of supporting declarations, Judge Brinkema rejected much of the plaintiff’s fee petition (along with the conclusions in the six supporting declarations) and essentially adopted much of the opinion and analysis expressed by Mr. Travell.

Mr. Travell’s declaration is extensive, at 18 pages long with 47 paragraphs.  He discusses in detail the steps he took to form his opinion (including documenting the telephone calls he had with the respective counsel).  He recounts the applicable law, and then provides a detailed recitation of the facts (citing and quoting from the pleadings in the case).  The heart of his declaration, however, appears to be nearly eight pages of detailed examination of the plaintiff attorney’s time records, including identifying alleged instances of double-billing, block-billing, and vague entries.

In her opinion, Judge Brinkema sided with Mr. Travell’s declaration because he “actually reviewed counsels’ billing records, provide[d] a detailed analysis of those records, discusse[d] the specific issues involved in the case, and evaluate[d] the work performed with respect to those issues.”  In contrast (according to the court’s opinion), the six supporting declarations were unpersuasive because none went into a “detailed analysis of plaintiff’s counsels’ time sheets; instead, the declarants base their conclusions almost exclusively on a review of the pleadings and of [plaintiff counsel’s] declaration.”

Mr. Travell’s declaration is another example of judicial pushback in the Eastern District against excessive attorney hourly rates (or, at least hourly rates perceived as excessive by the bench).  But it also likely signals that some judges will more closely scrutinize petitions for attorney’s fees, including attorney declarations that support and oppose those petitions.  For this reason, Mr. Travell’s declaration is likely a roadmap for future petitions in the Alexandria Division, if not throughout the Eastern District.  And the irony is straight-forward:  While the intent may be to hold down hourly rates, the added expense of more detail in such declarations will ultimately increase the cost of litigation overall.  But regardless of this impact, practitioners need to be aware of this possibility.

Is there a New Cap on Recoverable Attorney Rates in EDVA?

There is yet further disagreement among the judges of the Eastern District regarding reasonable attorney hourly rates.  As we noted in a previous EDVA Update here, this disagreement is manifesting itself most frequently in the Alexandria Division, as judges there confront (and push back against) the higher hourly rates frequently charged by larger law firms in the Northern Virginia/ DC metro area.

Today’s example of the disagreement comes in the recent case of Integrated Direct Marketing, LLC v. Drew May, et al., 1:14-cv-1183, 2016 WL 3582065 (E.D. Va. June 28, 2016).  In this case, Judge Leonie M. Brinkema of the Alexandria Division of the Eastern District invited a plaintiff to file a motions for sanctions and attorney’s fees after successfully demonstrating that the defendant made materially false statements in both an affidavit and during courtroom testimony.  But after the plaintiff petitioned for over $63,000 in attorney’s fees, Judge Brinkema strongly criticized the hourly rates and record keeping of plaintiff’s counsel, and she cut the fee award down to only $17,000.

To justify their hourly rates, plaintiff (represented by attorneys from both the DC and Connecticut offices of Ogletree, Deakins, Nash, Smoak & Stewart, PC) relied upon the matrix of hourly rates approved by Judge Gerald Bruce Lee in Vienna Metro (discussed in a prior EDVA Update here).  But Judge Brinkema rejected the Vienna Metro matrix.  By doing so, she sided with Judge T.S. Ellis’s opinion in Route Triple Seven (also discussed in a prior EDVA Update here) in the ongoing dispute regarding hourly attorney rates.  Below is a summary of the experience levels of each attorney, the hourly rates sought by the plaintiff, and the rates awarded by Judge Brinkema:

Attorney’s Legal Experience

Requested Hourly Rate

Awarded Hourly Rate

30 years $ 545 $ 450
9 years $ 395 $ 350
6 years $ 335 $ 275
5 years $ 320 $ 250

To set these hourly rates, the court followed the rates determined by Judge Ellis in Route Triple Seven.  Significantly, Judge Brinkema did not rely upon any other expert witness testimony or evidence to set these hourly rates.  (And, as we saw in the Route Triple Seven case, there the court relied upon its own “experience” to determine an appropriate reasonable rate.)  These hourly rates are in sharp contrast to the $550 – $600 hourly rates approved by Judge Lee in Vienna Metro.

It is clear that a revolt against high hourly rates (or, at least, rates perceived as high) is brewing among many judges of the Alexandria Division of the Eastern District.  It also appears that a hard cap of approximately $450 – $500 for an experienced attorney’s hourly rate is forming, at least in the eyes of several judges who have rejected the Vienna Metro matrix.

Further Disagreement on the EDVA Bench over Attorney Rates

Multiple recent decisions from the Eastern District show a widening disagreement among the judges regarding “reasonable” hourly rates for attorneys.  This disagreement is manifesting itself most notably among the judges of the Alexandria Division as they rule on attorney’s fees petitions that involve lawyers from firms based in both Virginia and downtown DC.  Rates acceptable to at least one judge have been rejected by other judges within same division.  The bottom-line for practitioners is that it is not sufficient to be familiar with the general precedent in the Eastern District when applying for attorney’s fees.  Rather, practitioners must know their individual judge’s history and preferences, while carefully crafting the petition for attorney’s fees.

$400,000 Attorney’s Fee Cut by 67%

In Salim v. Dahlberg, 1:15-cv-468 LMB / IDD, 2016 WL 2930943 (E.D. Va. May 18, 2016), Judge Leonie M. Brinkema wrote a 49-page (!) opinion on just the question of recoverable attorney’s fees.  There, she rejected both the Laffey Matrix and the Vienna Metro matrix to determine reasonable hourly attorney rates in Northern Virginia.  In the 49-page opinion, Judge Brinkema goes into great detail to analyze the hourly rates requested by the plaintiff, the billing records submitted by the plaintiff’s counsel, the six supporting affidavits submitted by plaintiff (including many leading local practitioners in Alexandria), and the defendant’s opposition (which included only a single opposing affidavit).  In the end, Judge Brinkema largely sided with the defendant and cut plaintiff’s fees down from $400,000 to a just over $151,000.

In the underlying case, the plaintiff alleged various federal and state civil rights claims against the defendant.  After a favorable jury verdict, the plaintiff petitioned for attorney’s fees under Virginia Code Ann. § 8.01-42.1.  Plaintiff was represented by the firm of Victor M. Glasberg & Associates, and sought hourly rates for the work of two attorneys:  $550/hour for lead counsel with 39 years of experience, and $250/hour for an associate attorney with less than one year of experience.

Plaintiff’s counsel must have expected a fight to recover fees because they submitted six affidavits of leading local lawyers.  While Judge Brinkema noted that these six local lawyers were “well-known and well-respected by the Court,” none of the affidavits swayed the judge.  Instead, it was the defendant’s opposition and single affidavit submitted by Attorney Wayne G. Travell that carried the day.  Judge Brinkema objected that the plaintiff’s six affidavits were “conclusory” in nature and omitted detailed discussion of the plaintiff’s billing rates and records.

Vienna Metro and Laffey Matrices Rejected

Judge Brinkema rejected the Vienna Metro matrix, characterizing it as applying only to “complex civil litigation.”  Instead, her opinion relied primarily upon Judge T.S. Elliss’s opinion in Route Triple Seven (discussed in a prior EDVA Update here) which characterized a rate of $420 as the “upper limit for what counts as a reasonable rate for a very competent attorney in an uncomplicated . . . dispute.”  Further, Judge Brinkema also rejected the Laffey Matrix of DC-based attorney hourly rates published by the U.S. Department of Justice.  According to Judge Brinkema, DC-based hourly rates are not properly comparable for litigation in the Alexandria federal court.

While the defendant’s expert did not challenge the $550/hour rate sought by plaintiff’s lead counsel, Judge Brinkema cut it down anyway to $500/hour, and then reduced the recoverable hours by half.  Turning to fees requested for plaintiff’s junior counsel, Judge Brinkema cut the hourly rate down from $250 to $125 on the grounds that the newly-minted attorney had not yet been admitted to the Virginia Bar (having just recently graduated from law school).  Because of this, Judge Brinkema characterized the young attorney’s contribution as more akin to a law clerk, and she applied the lower hourly rated recommended by the defendant’s expert.

Conclusion

Judge Brinkema appears to be speaking to the bar in this 49-page opinion, which provides a roadmap for future petitions for attorney’s fees.  As the disagreement over hourly rates among the judges of the Eastern District grows, it is critical for practitioners to understand where each judge comes down on this issue.  This opinion is required reading for any practitioner who expects to submit an attorney’s fee petition to Judge Brinkema in the future.

Practitioner’s Alert: EDVA Adopts Electronic Filing for Civil Complaints

The Eastern District continues to march towards a paperless practice.  As of October 3rd, civil complaints and notices of removal must be electronically filed via the CM/ECF system.  Previously, such documents were filed on paper with a physical trip to the Clerk’s Office.  Now, the filing attorney uses a computer screen, and the process requires close attention to the details of the CM/ECF system.  While the Clerk’s Office has provided a five-page handout on the new procedure, practitioners are well-advised to build extra time into their filing schedule so they may seek assistance from the Clerk’s Office in the event of a question or mistake.

1.  Uploading the Complaint

The new process begins with uploading a complaint (or notice of removal) and a civil cover sheet to the CM/ECF system.  When filers log into the CM/ECF system, they see the following new option:

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Despite its strange text, this is the option to open a new case.  Click this option to bring the user to a drop-down menu which includes “Complaint”, “Notice of Removal”, and other less-common methods to open a new case.

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After selecting the appropriate filing and clicking the Next button, the user sees a warning and explanatory screen about the “shell case” number.

2.  The “Shell Case” Number

The “shell case” number is essentially a dummy case number that is temporarily assigned to the new case.  It is always the same (five 9’s), but also includes the Eastern District division-specific number and the last two digits of the current year.  An example is this:  1:16-at-99999.  Filers will see the following warning screen to remind them of the appropriate division numbers:

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On the next screen, filers will enter in a text box their proper division number, last two digits of the current year, and the dummy shell number (five 9’s).  It is important to note that the last two digits of the current year always follows the division number and a colon along with “-at-”.  In the following example, the Alexandria division number is used (“1:16-at-99999”):

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Once the Clerk’s Office receives the new filing, it will assign a proper case number and replace the dummy shell number.

3.  Important Attachments to the Complaint

After the filer has entered the dummy shell number, the next screen will look familiar.  At this screen, the user will select the “main document” to be uploaded (e.g., the actual complaint or notice of removal) followed by any attachments to the main document.  Possible attachments include:

  • Exhibits to the Complaint/Notice of Removal
  • Civil Cover Sheet
  • Corporate Disclosure Notice (if applicable)
  • Proposed Summons

Here, the civil cover sheet is important, and it must be included.  The Clerk’s Office will use this to assign a proper case number, and any filing omitting the civil cover sheet will likely be rejected by the Clerk’s Office.

In contrast, a proposed summons is optional at this point.  Filers may omit the proposed summons if, for example, they wish to initiate the lawsuit but delay service of the complaint.  If a proposed summons is attached, the Clerk’s Office will process and then issue the summons via the ECF system.  Upon receipt of the summons, attorneys must print two copies to be served with the complaint (one copy remains with the defendant while the other is executed by the process server, returned to the serving attorney, and then filed via the ECF system).

4.  Enter the Case Title

The next screen allows the filer to enter the case title in the format of “Plaintiff v. Defendant.”  The Clerk’s Office has not given much guidance on how this text will be used, and there is little room provided for multiple plaintiffs or defendants.  It is important to give thought to this case title (such as whether “et al.” should be used) because the exact text will likely appear in all ECF notices for the case.

5.  Pay the Filing Fee via Credit Card

The next screen asks whether the filer is exempt from paying the standard filing fee.  For most civil practitioners, the answer here will be No.  Clicking the Next button will then take the filer to the federal government’s Pay.Gov website to pay the filing fee (which is outside of the CM/ECF website).  Credit cards are the most common forms of payment, though Pay.Gov is moving towards allowing payments via PayPal and even Amazon.com accounts.  The important change from traditional practice, however, is that checks (including law firm checks) are no longer acceptable for filing fees.

Once the fee is paid via Pay.gov, the filer is routed back to the CM/ECF website.

6.  Save Your NEF!

After payment is made, the filer is shown a final confirmation screen.  This will be familiar to ECF filers as it asks the user to “commit” to the transaction while displaying the file paths for the main documents plus any attachments.  Once the user clicks the Next button (and assuming payment was successfully made), the case is now “filed.”

The final screen displayed is the Notice of Electronic Filing (“NEF”), also familiar to frequent ECF users.  But there are two important differences with this NEF as compared to other filings.  First, the case number will show the dummy shell number (but prefaced with the division-specific number).  Later NEFs will contain the correct case number assigned by the Clerk’s Office.

Second, the filer should save a copy of this NEF because it will not be emailed to the filer (unlike every other NEF in a case).  This is the filer’s receipt, and it should be treated like the paper receipts received from the Clerk’s Office in past generations.

When, Exactly, are you Filed?

Practitioners who are close to a deadline (such as a statute of limitations deadline) are rightly concerned about when their case is deemed “filed.”  Traditionally, a case was considered “filed” on the day that the Clerk’s Office received the initial papers (usually a complaint) AND the applicable filing fee.  This all had to be done before the end of regular business hours (usually 5:00pm) and the close of the Clerk’s Office’s doors.  Under the online system, CM/ECF and Pay.Gov accept payments 24 hours a day (except when the Pay.Gov website is down for maintenance).

So, theoretically, a case will be deemed filed as long as the filer completes the document upload process, pays the filing fee online, and receives the initial NEF prior to 11:59pm.  But there has been no case law yet testing this assumption.  Further, if something goes wrong, the filer will have to wait until the next business day to speak to a representative in the Clerk’s Office.  Additionally, Pay.gov is fairly frequently down for maintenance (but usually after regular business hours or on weekends).  This is all the more reason to not wait until after business hours on the last day of a statutory deadline to file a new complaint.

Watch your PDF File Size

The Clerk’s Office warns users to be careful about the file size of their PDFs uploaded to the system.  The current file size limit is 50 megabytes, which is more than plenty for most normal filings.  If, however, a user is scanning images of pre-printed pages (as opposed to the more efficient method of converting MS Word documents directly into PDFs using software), then the 50 MB limit could be violated, especially if color photographs are included.  In this situation, the user needs to consult someone else who is well-versed in efficiently handling PDFs to solve the problem.

 Emergency Motions

The Clerk’s Office notes that in the case of “emergency” motions (such as requests for emergency TROs), the user should follow the process outlined above to file the complaint.  After filing, the user should call the divisional Clerk’s Office to flag the emergency nature of the case.  The Clerk’s Office will then expedite the opening of the civil case.  Once the case is opened, the user can then electronically file the motion for the TRO and any supporting documents.  But, again, the Clerk’s Office will only assist during normal business hours.

Exceptions to Electronic Filing

There are at least six exceptions to the electronic filing process at this point:

  • Qui tam cases
  • Cases filed under seal
  • Pro se cases
  • Ship attachments
  • Receivership cases
  • Registration of Foreign Judgments

These cases are still filed in paper in the traditional way at the counter of the Clerk’s Office, though it is likely that, with future improvements to the CM/ECF system, this list will be whittled away.

When in Doubt, Call the Clerk’s Office

 As most regular Eastern District practitioners already know, we are blessed to have a professional and helpful staff in each of the divisions’ Clerk’s Offices.  Whenever there is a question, problem, or mistake (as routinely happens involving attorneys and electronic filing) the best bet is to immediately call the Clerk’s Office.  Most offices have a specific staff member assigned to answer ECF questions, and in this author’s experience, they have always been friendly, helpful, and efficient.  But they can only help during normal business hours.  Yet another reason not to wait until 11:59pm on the day that the statute of limitations runs.

Defend Trade Secrets Act of 2016 Delivers New Relevancy for the “Long Arm” of FRCP 4(k)(2)

In this blog post, we reach back to a 2003 Judge Ellis opinion applying FRCP Rule 4(k)(2). In Graduate Management Admission Council v. RPV Narasimha RJU d/b/a GMATPlus.com, 241 F. Supp. 2d 589 (E.D. Va. 2003) (the “GMAC Case”), the judge applied this little-known rule to rescue a complaint from dismissal for lack of in personam jurisdiction.  The decision has had little visibility, but with the recent enactment of the Defend Trade Secrets Act of 2016 (“DTSA/2016”) the rule and the Judge Ellis’s opinion have new relevancy.   Stated differently, Rule 4(k)(2), as applied by Judge Ellis thirteen years ago, potentially turbocharges DTSA/2106’s role in trade secrets litigation involving overseas defendants.

Rule 4(k)(2), the Federal Long-arm Statute

Rule 4(k)(2) is buried deep in Rule 4, which has the innocent title of “Summons.”  Rule 4(k), titled “Territorial Limits of Effective Service,” also seems easily overlooked.   Our target, subpart 4(k)(2), provides:

(2) Federal Claim Outside State-Court Jurisdiction. For a claim that arises under federal law, serving a summons or filing a waiver of service establishes personal jurisdiction over a defendant if:

     (A) the defendant is not subject to jurisdiction in any state’s courts of general jurisdiction; and

     (B) exercising jurisdiction is consistent with the United States Constitution and laws.

It’s a decent bet that most of us (except some of the patent bar), even those with decades of federal court experience, have never before encountered Rule 4(k)(2).  Since its arrival in 1993, the rule has only rarely been applied, and the limited appearances have mostly been in patent and copyright cases.

The 2003 GMAC Case

In the GMAC Case, Judge Ellis rescued a copyright infringement complaint by resorting to Rule 4(k)(2) on behalf of a plaintiff who was having difficulty establishing in personam jurisdiction using Rule 4(k)(1) and the Virginia long-arm statute.   The issue was jurisdiction over an Indian citizen who was selling copyrighted GMAT questions marketed as test preparation resources for aspiring MBA candidates.   The solicitations and sales of the test preparation materials were made over the Internet, and seemingly were not directed to any one state but at a broader United States market.  The defendant failed to answer GMAC’s complaint notwithstanding adequate service in India.

Following routine court procedures, Judge Ellis referred the case to Magistrate Sewell to prepare the R&R report.  The magistrate considered the jurisdiction claim under Rule 4(k)(1) and the Virginia-long arm statute as the complaint alleged.  The magistrate concluded that while the conduct fell within the expansive reach of the long-arm statute, the constitutional due process requirements for in personam jurisdiction were not met.

The case might have disappeared from the radar screen at that point, but Judge Ellis saved the case using Rule 4(k)(2).  GMAC’s complaint came before Judge Ellis when the plaintiff challenged the R&R report.  The judge agreed with the magistrate’s conclusions regarding the Virginia long-arm statute, but he applied retroactively Rule 4(k)(2) (the plaintiff had not alleged jurisdiction under Rule 4(k)(2)), which is often referred to as the Federal long-arm statute, to find in personam jurisdiction.   Citing authority from the 1st Circuit and the 7th Circuit, Judge Ellis explained:

Rule 4(k)(2) was added in 1993 to deal with a gap in federal personal jurisdiction law [identified in Omni Capital Int’l, Ltd v. Rudolph Wolff & Co., 484 U.S. 97 (1987)] in situations where a defendant does not reside in the United States, and lacks contacts with a single state sufficient to justify personal jurisdiction, but has enough contacts with the United States as a whole to satisfy the due process requirements.

The GMAC Case fell into the gap identified in the referenced 1987 Supreme Court decision, only to be rescued by the little-known rule.

Judge Ellis’ decision is important not just because it reminds that Rule 4(k)(2) is part of the landscape, but also for his retroactive use of the rule and how he assigned the burden of the tricky third element in the analysis under the rule.

Three-part Analysis Under Rule 4(k)(2)

When Rule 4(k)(2) comes into play, it tracks a three-part analysis taken directly from the rule’s text.  First, the rule applies the same minimum contacts due process analysis that is conducted under Rule 4(k)(1), but with the significant difference that the relevant forum is the United States as a whole, not an individual state.  The second element of the rule is that the claim arises under federal law.   In the GMAC Case, Judge Ellis cited five federal statutes, including the Copyright Act, invoked in the complaint.

The third and final element—the tricky element—requires a showing that the defendant is not subject to the jurisdiction of the courts of general jurisdiction in any particular state.  Courts have wrestled with how to assign the burden on this element.  Does the plaintiff have to prove a negative across 50 states?  Or does the burden fall to the defendant to establish that at least one state should have jurisdiction?

Judge Ellis answered the burden question—it is the defendant’s burden to identify some other forum state, and if no state is identified then Rule 4(k)(2) applies.   The defendant in the GMAC Case was in default and did not appear; Judge Ellis found that there was no evidence showing the jurisdiction was not available in any one state, and from there moved to his conclusion that Rule 4(k)(2) gave the court jurisdiction.  The judge followed a mix of the 1st Circuit’s pure burden shifting approach from United States v. Swiss American Bank, 191 F.3d 30 (1st Cir. 1999) and the 7th Circuit’s more pragmatic approach in ISI Int’l, Inc. v. Borden Ladner Gervais, LLP, 256 F.3d 548 (7th Cir. 2001) where a defendant must name a suitable forum state or concede that jurisdiction is not available in any state.   Under Judge Ellis’s logic, a defendant who has general contacts with the United States but who coyly argues that it cannot be sued in the forum state and then refuses to identify any other state where the suit could be brought faces in personam jurisdiction under Rule 4(k)(2).

The Rule 4(k)(2) case law in the years since the GMAC Case is sparse outside the patent arena.  Not surprisingly, because the cases where the rule has been applied are mostly patent and copyright matters, the Federal Circuit has spoken.    In Merial Ltd. v. Cipla Ltd, 681 F.3d 1283 (Fed. Cir. 2012), the Federal Circuit employed an analysis much like Judge Ellis’s GMAC Case opinion, and approved retroactive application of the rule.

The 4th Circuit’s consideration of Rule 4(k)(2) is not completely blank.   In the few reported cases, the court has been generally hostile to Rule 4(k)(2) argument, but has not offered much analysis.  In Base Metal Trading v. OJSC Novokuznetsky Aluminum Factory, 283 F.3d 208 (4th Cir. 2002), the Court rejected jurisdiction based on Rule 4(k)(1), and noted that there was insufficient evidence generally of contacts with the United States to support the Rule 4(k)(2) argument.   The same result for the same reason appears in Saudi v. Northrop Grumman Corp., 427 F.3d 271 (4th Cir. 2005).  More recently, in Unspam Techs., Inc. v. Chernuk, 716 F.3d 322 (4th Cir. 2013), in a case that alleged a conspiracy involving illegal prescription drugs, the appellate court rebuffed the Rule 4(k)(2) jurisdiction argument against four foreign banks that processed the associated credit card transactions.  The opinion cryptically states that jurisdiction “would not, in the circumstances here, be ‘consistent with the United States Constitution and laws.’”

The Combination of Rule 4(k)(2) and DTSA/2016

As suggested above, Rule 4(k)(2) and the GMAC case might easily have been left in the irrelevancy bin.  In copyright, patent, and trademark cases where the defendant is foreign, perhaps from India or China, the evidence often is sufficient to pinpoint one or more states, or at least to provide sufficient contacts to satisfy the due process concerns associated with suing the foreign persons or entities in the federal courts in those states.  These cases likely arise after infringing goods are being sold and/or marketed, which means that there typically is evidence which supports jurisdiction under Rule 4(k)(1) and state long-arm statutes.  In the few cases where a defendant might contest state-specific activity, Rule 4(k)(2) allows the plaintiff to hold the defendant in the proceeding.

Claims alleging trade secrets misappropriation, on the other hand, very well might present facts that confirm misappropriation, but where the facts precede any significant targeted sales and marketing by the misappropriator.   The plaintiff could be seeking at an early stage to enjoin sales, and perhaps is aiming to employ DTSA/2016’s civil seizure remedies, including the ex parte remedies.   The conduct might come within DTSA/2016’s broad “misappropriation” definition, but limited facts connecting the activity to any one state could defeat in personam jurisdiction under Rule 4(k)(1) and state long-arm statutes.

Until the DTSA/2016 enactment, trade secrets claims were governed by state laws, which meant that Rule 4(k)(2)’s application was blocked because the second element of the analysis could not be satisfied.  Under DTSA/2016, just about every trade secrets claim is now a federal claim, and the rule’s three-step analysis can now be satisfied.  This does not negate the requirement of established contacts with the United States generally, but trade secrets cases against foreign defendants now have a fortified argument to get around the earlier nemesis of the lack of in personam jurisdiction

Conclusion        

The combination of Rule 4(k)(2), as applied by Judge Ellis back in 2003 in the GMAC Case, and the enactment of DTSA/2016 potentially opens wide the doors of federal courthouses to trade secrets litigation against overseas defendants.   For litigators who represent foreign companies, there is new concern that their clients can now be forced to defend trade secrets cases in the U.S. federal courts.  And for those attorneys whose clients have reason to complain about misappropriation of their trade secrets by overseas entities, the combination of Rule 4(k)(2) and DTSA/2016 is an invitation to bring their claims here.